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Dynamic Education Signaling with Dropout, Second Version

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  • Francesc Dilme

    ()
    (Department of Economics, University of Bonn)

  • Fei Li:

    ()
    (Department of Economics, University of North Carolina, Chapel Hill)

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Abstract

We study students' dropout behavior and its consequences in a dynamic signaling model. Workers pay an education cost per unit of time and cannot commit to a fixed education length. Workers face an exogenous dropout risk before graduation. Since low-productivity students' cost is high, pooling with early dropouts helps them to avoid a high education cost. In equilibrium, low-productivity students choose to endogenously drop out over time, so the productivity of students in college increases along the education process. We find that the maximum education length is decreasing in the prior about a student being highly productive. We characterize the joint dynamics of returns to education and the dropout rate and provide an explanation of the declining dropout rate over the time students spend in school. We also extend the baseline model by allowing human capital accumulation and show that the dynamics of the dropout rate are helpful in decomposing the returns to education into the signaling effect and the human capital accumulation effect.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-048.

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Length: 40 pages
Date of creation: 03 Jun 2012
Date of revision: 03 Sep 2013
Handle: RePEc:pen:papers:13-048

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Keywords: Dynamic Education Signaling; Dropout;

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References

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  1. Braz Camargo & Benjamin Lester, 2011. "Trading dynamics in decentralized markets with adverse selection," Working Papers 11-36, Federal Reserve Bank of Philadelphia.
  2. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, Econometric Society, vol. 80(4), pages 1433-1504, 07.
  3. Francesc Dilmé, 2012. "Dynamic Quality Signaling with Moral Hazard," PIER Working Paper Archive 12-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Jeroen M. Swinkels, 1997. "Education Signaling with Preemptive Offers," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1175, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Habermalz, Steffen, 2003. "Job Matching and the Returns to Educational Signals," IZA Discussion Papers 726, Institute for the Study of Labor (IZA).
  6. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
  7. Kremer, Ilan & Skrzypacz, Andrzej, 2007. "Dynamic signaling and market breakdown," Journal of Economic Theory, Elsevier, Elsevier, vol. 133(1), pages 58-82, March.
  8. Kelly Bedard, . "Human Capital Versus Signaling Models: University Access and High School Drop-outs," Claremont Colleges Working Papers, Claremont Colleges 1999-01, Claremont Colleges.
  9. Hanming Fang, 2006. "Disentangling The College Wage Premium: Estimating A Model With Endogenous Education Choices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1151-1185, November.
  10. Oksana Leukhina & Lutz A. Hendricks, 2011. "The Return to College: Selection Bias and Dropout Risk," 2011 Meeting Papers 311, Society for Economic Dynamics.
  11. Weiss, Andrew, 1983. "A Sorting-cum-Learning Model of Education," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 420-42, June.
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